The Loneliness of the Land Value Taxer

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It had to happen sooner or later. I have, I think, managed to write an avowedly Liberal Democrat blog for some six months now without once mentioning Land Value Tax, but the day has finally dawned.

Naturally, I don’t intend to discuss LVT in any detail. I certainly approve the principle of taxing wealth rather than income, plus lots of awfully jolly clever people I know are in favour of LVT, so we in the People’s Republic of Mortimer are content to give holding support to LVT until such time as we understand what it is. No, my interest today lies in the psychology surrounding it.

It’s a running joke in the Lib Dem blogosphere (O! how we laughed!), that race to be the first one to say “Of course, if we had LVT it wouldn’t be a problem…” in response to any sort of tax-based discussion or comment whatsoever. Only the other day Our Vince guested on Lib Dem Voice for a well-deserved blast at Darling, darling!, who has belatedly been informed by his gap year intern that the Labour policy of slapping a flat levy of thirty grand on non-domiciles for keeping their privileged tax status is in fact a “bloody stupid idea”, as the People’s Republic amongst many, many others could have told him at the time.

The first – and for some time, only – response to Vince’s piece was from the LVT eggs, and was in much the usual vein. It’s like watching someone trying to smell through their ears when LVT eggs get onto tax threads. The mismatch between subject matter and chosen instrument of perception is so total that the discussion is over before it has begun. Essentially, if you believe as passionately as some do that LVT is the only viable liberal tax system and refuse to discuss all lesser proposals on their own terms, what you have is a non-debate. I have mixed feelings on this. On the one hand if you are one of the passionate LVT eggs, nursing continual frustration in your hopelessly well-read bosom that the party doesn’t wuv it just as much as you do, I can see how you want to take any opportunity to hammer home your point. You may end up coming on like Cato the Elder on the subject of Carthage* but hey, you’re a political activist, you bought into being boring a loooong time ago – at least an idealist’s issue is kept alive, and the blogs are one of the few places in the party where that is continuously true. Top banana to you.

On the other hand, this is tax policy. Tax policy tends, by its nature, to be highly practical and potent stuff. Elections are won and lost on the fine detail of it in a way that isn’t true for other areas of policy. So when a particular aspect of the government and opposition’s tax policy is so obviously flawed, and ours so obviously superior, don’t the actual circumstances of the case merit a mention? Doesn’t Our Vince merit a(nother) pat on the back for keeping it real? Doesn’t Martin Land on the LDV thread have a point, albeit an unwelcome one, when he says, “If only we could find a way of combining LVT, PR and opposition to Trident into one single policy we could truly bore the electorate to death”?

I’m not convinced that non-domiciles are a particularly good advert for LVT anyway.

“What about non-doms who don’t own property in the UK?” says I, “LVT will only trouble non-doms who have decided to settle and live in the UK to the exclusion of everywhere else. This by definition is likely to be non-doms of modest means. Rich non-doms will simply redistribute their landed assets in the most tax-efficient way. Anecdotally, plenty of internationalist non-dom bankers live in luxury rentals in Kensington and Chelsea and earn vast tax-free salaries in the city.” Yes, I said all that.

“Pah!” says they, “LVT will be passed on to the tenant in the form of higher rents.”

This is true as far as it goes, but it passes over my central point (which wasn’t that well expressed): LVT is based on ownership and stakeholding in the UK. Non-doms occupy a very peculiar position – they come here to make money from employment, not investment. They choose London (generally) as their place of employment for a reason – it is the financial capital of Europe, it is the commercial setting their career cannot thrive without. The UK’s financial industry is a resource used by many wealthy non-doms to make money – a resource that essentially belongs to the host country and its taxpayers. It is impossible, under LVT, to tax wealthy non-doms specifically on the use of that resource. Looked at that way, non-doms are possibly one of the few groups for which it is possible to make an argument for taxing income and not wealth.

After the LVT eggs and I had partied on for a bit, Diversity made a far more effective comment which I shall, if I may (ha, like you have a choice) quote in full:

In practice no tax is perfect; not even green taxes and LVT. Vince Cable’s point is that the Government’s and the Tories proposals for taxing nondoms are downright bad. Seven years and then normal tax is, as always, not perfect. However it is far less damaging than the other parties’ proposals. Once again, Vince is the competent economic manager in the House.

Please get your facts right. Non-doms do not get tax free salaries. All salaries are taxed in the UK for all UK residents (dom or non-dom). If someone is drawing this mythical tax free salary then he is evading tax which he will continue to after the new rules come into place and by the way such evasion can be done by doms as well as non-doms.
thanks

My facts are perfectly correct. “Tax-free salary” is a practical shorthand for the practice of receiving a salary which is taxed via PAYE as usual and then reclaiming a large repayment at the end of the tax year based on non-domiciled status and overseas duties status – both of which are commonly found in the banking profession based in London. If you wanted to cavil I suppose you could say “tax-free salary” is a somewhat sloppy way of indicating this – it does the basic job as far as I’m concerned, and is much shorter. See my previous blog post, linked to above.

Which is what the LVT eggs essentially said. It depends whether you think their use of the UK as an abstract, rather than concrete, resource is a usage that ought to be taxed. I suppose an LVT egg would still say no because thereby you are taxing enterprise in some sense, which is an infinite resource as opposed to land and therefore you can stunt its growth. There still seems something essentially unfair to me about UK taxes supporting the kind of society that allows London the banking centre to flourish, and that people then make use of that without contributing in a direct and measurable way for their use. But I can accept I might just be unreasonably bitter about this, and that you, er, shouldn’t use a tax system to clobber people you don’t like, chiz chiz grumble.

There still seems something essentially unfair to me about UK taxes supporting the kind of society that allows London the banking centre to flourish, and that people then make use of that without contributing in a direct and measurable way for their use.

That’s a good point, and an LVTer would agree with you insofar as that most of the non-doms would end up paying more under LVT than they do now.

Personally, I have no real problem with the notion that other people are making a lot of money without paying a lot of tax. It’s not the making money that bothers me, it’s the costs that they are incurring on others. A full-time UK resident incurs costs on others by occupying land, using public goods (e.g. roads), using the education system, the protection of the legal system and so forth. It’s worth remembering that all of our wealth would evaporate instantly if the law ceased to function, because wealth is backed by legal claims of ownership. If you own a mansion, the only thing that makes you wealthy is the fact that the law recognises your ownership of said mansion. Paying for the upkeep of the law is, in this sense, no different to paying insurance premiums.

Non-doms certainly incur some of the above costs on society and should certainly pay their way in doing so. But, then again, so should everyone. In fact, as I understand it, part of the non-dom problem is that it’s not entirely clear where the earnings are being made, so non-doms are working in the UK but claiming that their income comes from overseas. Whilst doing this with income is relatively easy, doing this with land is very difficult. So, making a non-dom pay their way under LVT might be easier than under an income tax system, because you always know where the land is.

I entirely accept that LVT is *on the whole* easier to levy and harder to avoid than income tax. I still just don’t see how specifically *non-doms* will be easier to tax (and caveat, I’m talking about the richer ones here) because they’ll move any landed assets abroad and be even better off as far untaxed income goes. And the idea of LVT being passed down through higher rents is not something I am at all keen on! Yes, UK domiciles will be in the same position with untaxed incomes, but still pay direct LVT, or if they rent, they’ll be subject to the same effect as non-doms – doesn’t that just put everyone back to square one, so the fundamental point that rich non-doms use the UK economy to make money which they then remove from the country goes unaddressed?

Now I come to think of it, if it was legitimate to pass LVT down through rents (which is something that could never be regulated) wouldn’t that just encourage mass property ownership by a few individuals, because they’d only ever have to pay LVT on their own property? I’m assuming that in the brave new world of LVT, capital gains tax would cease to exist – wouldn’t these people be able to get their tenants to pay LVT on their property investments and sell them tax-free?

Technically, that’s not our problem, it’s the problem of the jurisdiction that they’re moving their landed assets to. And, remember, we want people to do this, because if they’re holding land unproductively in this country, we want them to sell it to someone who will use it.

If a non-dom does not own property in the UK, they wouldn’t (directly) pay LVT. If they want to rent in prestigious areas, they would end up contributing to LVT by paying the necessary rent to live in those areas. This means that the landlord would be paying the tax, but funded directly from rent paid by the non-dom.

And the idea of LVT being passed down through higher rents is not something I am at all keen on!

This is only a problem in areas where rents and land values are extravagant. As such, it’s a London problem and simply does not apply anywhere else. An LVTer might even argue that LVT would force some people out of these areas, thus depressing rents and land values over time. Or, alternatively, it might mean that only rich people can afford to live in these areas (which, arguably, is true already; at least under LVT they’d be paying through the nose for the privilege). I’m tempted to suggest that if this doesn’t work for London, then perhaps the negative effects could be handled via the GLA? For the rest of the country, land values and rents simply aren’t that high. And, of course, increased LVT payments would be offset by the abolition of council tax and the reduction (or, ultimately, abolition) of income tax.

non-doms use the UK economy to make money which they then remove from the country

I’ve said above that I think that non-doms would end up contributing tax-wise, via LVT if they own property or rent->LVT if they don’t. But it’s also worth mentioning that much of the money in the financial services sector comes from overseas anyway, and we’re on shaky moral ground if we’re complaining about this money leaving again without us being able to tax it first.

Now I come to think of it, if it was legitimate to pass LVT down through rents (which is something that could never be regulated) wouldn’t that just encourage mass property ownership by a few individuals, because they’d only ever have to pay LVT on their own property?

Hmm. As I’m not a full-time LVT egg, I don’t have a ready answer, but my thought process is something like this: That LVT is passed on to the person renting the property is inevitable, just as with any other cost. Of course, the rental market is competitive, so it would not be economical to own empty properties. This shifts the balance in favour of tenants, whose threat of leaving the property becomes much more dangerous. Furthermore, LVT dilutes the advantage of owning a property over renting: if you rent, you pay the cost of the LVT plus a small (justifiable) profit for the landlord. If you own, you still pay the LVT, which is only slightly less than what the tenant pays.

Of course, this problem is largely solved by the application of the next piece of economic wizardry, the citizen’s basic income…😀

To be honest, by this point we’re so far into theoretical territory that I’ve ended up proving your original point: this kind of debate gets us nowhere in terms of winning votes or solving problems in the short term.

I pretty new to this LVT thingmebob, and therefore no egg, perhaps not even a twinkle in a rooster’s eye, but I thought one of the benefits of LVT was that it could not be passed to a tenant because rent is already at the maximum that a tenant is willing to pay – if the landlord increases rents to offset their LVT payment the tenant would then move to what were before marginal holdings at a lower rent. Don’t know how this would work in super-rich and crazy London though? I would also argue that it is a good way to recoup money from super-rich non-doms as I would suspect they would still be willing to buy property rather than rent. There are reasons beyond being a tax haven to live in London/UK if you are silly rich, it being the financial centre of the world being the best one. If you are asked to pay LVT for actually possessing a piece of London land, the super-rich will probably consider this a viable trade-off for living here.

However, if instead you turn around and say “Hey, you know all that money you got making shady deals with in post-soviet Russia or buying all the steel factories in the world? Well, we want it, scum” and then start laughing manically and rubbing your hands together they would probably tell you to eff-off and come and live with me here in Vaud, Switzerland where the nice authorities will let them choose how much tax they pay (Ingvar Kamprad did exactly that and now lives just up the road). They won’t consider the benefits of London to be worth such a large amount of money. If this was being implemented in Switzerland both Ingvar and I are non-doms but the different options would effect us in different ways:

LVT – Ingvar owns, he pays (not so much though as Epalinges ain’t that great), I rent in Ouchy (much nicer) but don’t pay as it doesn’t get passed on – Outcome: We both stay, Switzerland has both a rich person and a brilliant scientist
Fully taxed – Ingvar pays tax on $33 billion, I pay tax on my swiss federal income (which I do already) and outside income $0 – Outcome: Ingvar moves to a tax haven, I stay. The Science stays but the money moves abroad. Not much tax is raised.
Pay £30000(64000 CHF) – Ingvar pays 0.00002% of his wealth, I pay almost all of my salary – Outcome: The money stays but Switzerland loses incredible talent🙂. Not much tax raised.
Ingvar pays 64000 CHF, I pay income(I think this is the actually proposal) – Ingvar pays 0.00001% of his wealth, I pay tax on my Swiss federal income – Outcome: We both stay again, but not much tax is raised.
Status Quo: Ingvar pays what he pays, I pay on income – Outcome: We both stay, the Swiss get what they get.

So I would guess that LVT is the best proposal, followed by the Swiss status quo – both raise moderate amounts of money and nobody has to leave. So maybe there is an argument for negotiating tax rates with those that are currently flouting the system. But funnily enough, I can’t see the voting public being very happy about this.

In our ideal world where Nick and Miriam happily have tea and cake sitting by the fire in Number 10, with Vince beavering away next door, LVT would be the answer. But back in the Labour world they is no good solution to this problem – we either lose money, talent, tax or all three. It depends entirely on how, indirectly, the non-doms contribute to the economy. If it is more than the amount of tax that could be raised from the ones that wouldn’t leave if you closed the loopholes, the don’t close the loopholes. Unfortunately this is an impossible calculation to make. I would say losing tax is the least worst for the economy as a whole, which I suppose would mean keeping the status quo.

Rob, your point about empty properties being extremely uneconomic wins a cookie. It still won’t work that well for London, I think, for reasons outlined below, but in every other respect I agree it passes balance of power to the tenant which can only be good. For moi. And other people, obviously.

Second cookie for the shaky moral ground for taxing money that has partially been earned from abroad in some sense. I was starting to sense this nagging thought myself while commenting above, but solved the problem by repeatedly hitting it over the head with a bat.

OHA, there is a problem with the idea of negotiation though, which is that it is possibly illegal. In practice “negotiation” does happen; for example if a tax inspector is investigating someone they’ll get a sense about when they have hit the avoidance jackpot, and mitigate lesser penalties out of sheer practicality – man-hours put into the investigation and so on. They have to hit their targets like everybody else :-S. In the theoretical realm, however, putting a 30K flat levy on all nondoms is a sort of built-in official negotiation, and it’s an illegal one – it’s tacitly accepting that tax avoidance is going on, quite possibly involving much larger sums.

A related problem applies, I think, to the idea of calculating how to achieve the best tax outcome. Of course, these calculations are done all the time in small ways because people have to know how much revenue will arise. But to approach every question with only that in mind would depart from the theory underpinning the justification for collecting tax, which is to collect enough communal money for defence abroad and keeping public order at home (that’s the 1066 version, obviously).

Re: your point about rents not going up because tenants won’t tolerate it. Don’t know whether you’ve ever lived in London but I don’t think it would work like this. Rents are already stratospheric and there are no marginal holdings. It’s considered an economic disaster here if a flat is empty for a couple of weeks – and by that I don’t mean that they’re willing to negotiate because they’re not, I mean they aren’t used to not having five sets of people battering down every peeling door from Walthamstow to Herne Hill. If you’re flathunting more than three weeks before your moving date you basically have to lie because you’ll get told to come back later. And since that’s the same everywhere in London we would have absolutely no sodding choice if landlords started passing LVT onto us but to stay – unless we pissed off altogether of course, in which case you’d get the rich ghettoisation effect and long-term evening out as described by Mr Knight above, and that would no doubt be a total bundle of joy for all concerned…